What Happens if a Small Business Has Unpaid Payroll Taxes?

Running a business is a challenging endeavor. Not only do you have to deal with the day-to-day management of your company, but you also have to handle issues like employment taxes.

As a business owner, you’re responsible for withholding income tax from your employee’s wages. If you fail to do this, you’ll face severe consequences from the IRS.

Just as individual taxpayers must file their tax returns and pay their tax debts, so do business owners. This includes submitting your payroll taxes. Your staff trust that you’ll handle this correctly. They rely on this fact. Otherwise, they may not be eligible for unemployment benefits, Social Security, and other programs.

Here, we’ll discuss what happens if a small business owner has unpaid payroll taxes, including the penalties the IRS will assess should you fail to rectify the problem.

If you’re facing tax issues for your business, contact a local tax attorney or other tax professional for help. They can walk you through your options and help you decide how to proceed.

What Are Payroll Taxes?

If you’ve recently opened your business or are having issues meeting your tax liabilities, it's essential to familiarize yourself with tax law and how it impacts your company.

You must submit payroll taxes to the Internal Revenue Service as a business owner. If you fail to do this, you may face penalties and even criminal charges, depending on your situation.

Payroll taxes include more than just federal income tax withholdings. Your tax obligations also include the following:

• Medicare taxes
• FICA taxes
• Social Security taxes
• Federal unemployment tax

When these taxes go unpaid, the IRS looks at the responsible person - the business owner. Of course, if you’re like other business owners, you may have tasked a bookkeeper, human resources director, or other responsible party with handling tax problems.

Regardless of who in your company is in charge of this, you must confirm your company pays the full amount of its payroll taxes by the due date.

Do You Have to Withhold Payroll Taxes from All Employees?

Keep in mind that you don't necessarily have to withhold and submit payroll taxes for all your company’s employees. Some specific workers are exempt from paying these taxes. For example, if you have independent contractors working for you, you are not responsible for their payroll taxes. They must pay a self-employment tax.

One mistake some business owners make is not withholding payroll taxes from other employees’ paychecks, including:

• Casual workers
• Seasonal workers
• Temporary employees

Under federal tax law, you must withhold and pay taxes for the above workers, regardless of how many hours they work or how long they stay with your company.

When Are You Supposed to Pay Payroll Taxes?

Your due date for paying your payroll taxes depends on how often you pay your employees. If you pay your staff monthly, you must submit your payroll taxes by the 15th of the following month.

If you do payroll semi-weekly, you must typically submit your tax payment within one week. Specifically, if you pay your staff on Wednesday, Thursday, or Friday, you have until the following Wednesday to pay any outstanding taxes.

If you pay your staff on any other day of the week, you must submit payment to the IRS by the following Friday.

In addition to submitting withheld taxes to the IRS, you must also submit quarterly reports to the government. Specifically, you must complete and return Form 941 (“Employer’s Quarterly Federal Tax Return) to the IRS by the end of each quarter.

For example, the due dates for the 2025-2026 fiscal year are as follows:

• April 30, 2025
• July 31, 2025
• October 31, 2025
• February 2, 2026

The dates change annually. Check with your tax professional or tax attorney to confirm that you submit the correct reports by the corresponding due date.

What Will the IRS Do if You Don’t Submit Your Payroll Taxes?

If you (or your company) fail to submit payroll taxes, the IRS will decide whether to impose a “Trust Fund Recovery Penalty” (TFRP). The IRS must prove two things to impose this penalty. First, they must demonstrate that you are the “responsible person” regarding payroll taxes. It must also prove that you acted willfully.

You don’t have to own the business to be a “responsible person.” The government must only show that it was your job to ensure that your company pays payroll taxes in a timely fashion.

A responsible person may be any of the following:

• Business owner or manager
• Company CPA
• Officer, director, member, partner, or principal shareholder

The IRS makes this determination on a case-by-case basis. If you meet any of the following criteria, the IRS will likely identify you as a responsible person:

• You have the authority to write checks on behalf of the company
• You handle all payroll disbursements
• You control the financial affairs of the company
• You determine which creditors the company will pay
• You control the voting stock
• You sign employment tax returns

Once the IRS determines you are a responsible person, it will assess personal liability for the TFRP against the company and the responsible person. You won't face additional penalties if you pay the business taxes in full. However, if you do not submit your unpaid taxes in full, the IRS will withhold future tax refunds until the debt is satisfied.

Options Available to Small Business Owners

If the IRS assesses a penalty against you or your business, you have ten days to make payment in full. If you cannot afford to pay the back taxes, you can make an “Offer in Compromise,” which settles the debt for less than the full amount, or negotiate an installment agreement with the IRS.

The IRS would much rather make a payment plan for unpaid employment taxes and penalties than pursue further collection action. However, if need be, the government will pursue collection activity and, if warranted, a criminal investigation.

The IRS may pursue some (or all) of the following collection efforts against you:

• Tax liens
• Levy your bank account
• Withhold future tax refunds
• Report the tax debt to the public records

In addition to the above, unpaid taxes will make it more difficult to obtain credit in the future. Not only that, but your company’s reputation will suffer as well.

Can a Tax Attorney Help?

If you’re a small business owner facing trouble with your payroll taxes, you should contact an experienced tax attorney. The penalties and consequences of not paying your payroll taxes are severe. Having a tax law attorney by your side can help you avoid these penalties and achieve the best possible outcome.